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Chapter 10

Q. 10.ST.1

Given that shareholders can diversify away an individual firm’s exchange rate risk by investing in a variety of firms, why are firms concerned about exchange rate risk?


Verified Solution

Managers have more information about the firm’s exposure to exchange rate risk than do shareholders and may be able to hedge it more easily than shareholders could.  Shareholders may prefer that the managers hedge for them. Also, cash flows may be stabilized as a result of hedging, which can reduce the firm’s cost of financing.